FSAs and Your Tax Return

FSAs and Your Tax Return

What is a Flexible Spending Arrangement (FSA)?

Flexible Spending Arrangements (FSAs) are similar to HSAs in that you can use tax-free money for both medical and non-medical expenses. FSAs are set up by an employer in a cafeteria plan, where your employer provides certain benefits on a pretax basis. You, your spouse, or dependents are eligible for using the FSA for qualifying medical expenses. See Who’s Eligible for an FSA?

FSAs are also set up by “plan years.” This means that before the new plan year starts – this varies by employer – you choose how much you’d like to contribute for that plan year.

What types of FSAs are available?

There are several types of FSAs:

  • Health Care FSAs let you set aside pre-tax dollars for medical expenses. You and your employer may both contribute to the FSA.
  • Limited Expense Health Care FSAs cover only dental and vision medical expenses. People who have a limited FSA already have an HSA to help cover other medical expenses.
  • Dependent Care FSAs may be offered by your employer to pay dependent care costs. You and your employer may contribute to the FSA. You can use the FSA for child care costs for any child under age 13 in your household.

There are some major differences between an HSA and an FSA. For health and limited health FSAs, you don’t have to file anything with your return. You must file Form 2441 with your return if you have a dependent care FSA.

What are the tax benefits of an FSA?

Like an HSA, an FSA allows you to contribute pre-tax dollars from your salary. Your employer may also make contributions to your FSA account. You may withdraw the money tax-free if it’s used for qualifying expenses.

How much can I contribute to my FSA in a year?

You and your employer could contribute a total of $2,700 for 2019 (increases to $2,750 for 2020). At the beginning of each plan year, you’ll decide how much you want to contribute to your FSA. Your employer will then deduct a set amount per pay period. This takes careful planning, because you can’t change the amount you contribute unless your family or employment status change.

What happens if I have an FSA balance at the end of the plan year?

FSAs are “use-it-or-lose-it” accounts, meaning that any remaining balance at the end of the plan year is forfeited. However, your FSA plan may offer one of two ways to help you use up any remaining funds. The first option is a grace period of two and a half months after the end of the plan year, giving you extra time to use up the funds. An unused balance is not refunded to you.

Or your plan may allow you to carry over up to $500 to the next year. Anything above $500 would be forfeited. Also, the carryover doesn’t count as contribution for the next plan year.

Important: The plan may allow a grace period or a carryover, but not both. Neither is required, so check with your plan administrator.

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